UPS Strike Settlement, Bad Precedent…

By on August 6, 2006

Originally published in September 1997:

The market has had a pretty big hiccup over the last few weeks. However, the Dow should experience support around the 7400 area which would represent a 10 percent correction. Every time the market has experienced this sort of minor weakness it has come back without remorse and left the bears moaning. There really is no reason it should be different this time (although there are no guarantees of this made here). A drop of this magnitude is very insignificant historically speaking, and actually more the norm than we’ve experienced over the course of this bull market. The downdraft has been concentrated in the larger capitalization stocks as the smaller caps have gone on to new highs. Many consumer non-durable companies such as Coca Cola, Gillette and Procter and Gamble have been extraordinarily weak recently. The strength of the dollar has begun to impact their international sales and earnings comparisons. The consumer non-durables still trade at high multiples to earnings so it wouldn’t surprise me if underperformance in this particular group persisted for a few months.

UPS Strike Settlement…Bad Precedent for the Market

Unless you live in a cave, you heard about the strike the Teamsters union waged against United Parcel Service (UPS). The strike went on for over two weeks and through a settlement the workers were able to carve out a good wage increase. The strike made headlines and was written about incessantly in the editorial section of the nation’s newspapers. The ramifications for the stock market are not good.

The stock market is basically supported by company earnings. Earnings have been strong because of a number of factors. One big factor is the price of labor. Labor unions have been in decline for the past 15 years to the point where only a small percentage of U.S. workers are represented by them. Due to labor’s weakness, wages have not increased at the same rate as company profits. Weak wage growth has led to low inflationary pressures, greater company profits, and above normal stock prices.

The publicity of the UPS worker strike was transmitted to millions of U.S. blue collar workers, who have not benefited to the same degree as shareholders over the past 15 years. In essence, money has been lifted out of the pocket of workers and put into the pocket of shareholders since the early 80’s. If workers had received higher wage increases, company profits would have been lower and hence stock prices would be significantly lower. If labor begins to gain strength, the implications for stocks could be bad. A reversal of the trend we’ve experienced in the past would make workers the winners and shareholders the losers

A Fictional Account Continued from the Previous Issue:

The 1,500 point drop in the Dow Industrials on January 7, 2007 to 16,048 rattled Joe Schwab. However, the market was cheap and would turn around soon, Joe thought to himself. He would be retiring in five months and he was counting on the stock market to give him an income of at least $140,000 a year. Unfortunately, the market kept diving instead of recovering. Joe watched 16,000 fall a few days later….then 15,000 by the middle of February…..14,000 was history toward the end of February. Then the market did the unthinkable. On March 12, 2007, the market dropped a whopping 2,348 points to 11,303. Joe still had about $800,000, but his dream of a large retirement income was getting more unlikely by the day. The market just couldn’t make any headway which was so unlike the past. Joe thought to himself that maybe the market would only appreciate at a 10 percent annual rate. In this case his annual income would only be about $80,000.

As Joe watched his dreams crumble he felt animosity towards the “experts” who proclaimed the Dow would reach 20,000. “How dare they give such irresponsible advice,” Joe thought angrily to himself. Of course, Joe conveniently forgot how the many of the same market prognosticators had previously been right. He didn’t realize that no one could call the turning point of the market; not even the highly paid gurus he saw on television. Sure, Oppenweiner market analyst Maury Metz had been predicting the end of the bull market, but he had been saying it was over for more than 10 years.

As the Dow sank below 8,000, Joe watched his million dollar fortune dwindle to a comparatively paltry $620,000. All the advice he had been given about buying and holding was so much rubbish, he thought to himself. The experts were predicting a Dow of 5,000 and Joe was very afraid that he wouldn’t be able to support himself and his wife if the market dropped that low. What would Joe do now that his dreams were shattered? He sold everything on October 3, 2007, because he just couldn’t take it anymore with the Dow at 7,898, nearly 60 percent off its high. Stocks like Merck and Coca Cola were trading at 15-20 times earnings; substantially less than the 50+ P/Es they commanded before the Crash of 2007. Joe put his cash into certificates of deposit yielding 6.25 percent which would generate just under $40,000 a year; a lot less than the $150,000 he had been expecting. Joe would never venture into stock market investing again.

What can you do to avoid a similar experience as Joe? Number one, don’t become caught up in the emotion of the market and make inappropriate timing moves. Joe’s equity would have been substantially higher if he hadn’t succumbed to his emotions and switched his allocation at the least opportune times. Number two, research systematic approaches to investing and when you’ve found a good one stick to it, whether it be dollar cost averaging or some other unemotional methodology.

Interesting Opportunity

Recently some of the Southeast Asian stock markets have undergone a severe bear market not unlike the fictionalized version in the article above. This bears watching (no pun intended), as some of the most lucrative investment opportunities arise after markets have crashed. The currency crisis in Mexico a couple of years ago created a superb buying opportunity in Latin American stocks. Likewise, incredible bargains are surfacing in the Asian markets due to ongoing currency problems in some of those nations. I plan on buying some closed end funds such as the Templeton Dragon Fund, Scudder New Asia fund, etcetera, in an account not related to the “real world” portfolios to take advantage of what may be the best buying opportunity of the year.

Portfolio Updates

Unilever N.V. (NYSE: UN; 201 1/4) shareholder’s votes will be counted on September 22 regarding a proposed four-for-one stock split. If the split proposal passes, which it likely will, it will occur on October 13. UN has been weak along with the rest of the consumer non-durable group, but the majority of its correction has likely passed.

Royal Caribbean Cruises Ltd. (NYSE: RCL; 40 7/8) has proposed selling eight million additional shares of its stock. The proceeds will be used to pay down debt incurred with the acquisition of Celebrity Cruise Lines. The dilutive effect of this offering should be muted by the ongoing resurgence of demand in the cruise industry. This stock continues to perform exceedingly well and should continue on its upward path.

Callaway Golf (NYSE: ELY; 33 11/16) won several court judgments in Sweden and the U.S. recently regarding counterfeit golf clubs utilizing designs similar to Callaway’s trademark. This is a worldwide problem with any product that has gained consumer acceptance and can be easily replicated. However, Callaway appears to be on top of the problem and is actively pursuing legal action against perpetrators. These victories should send a message to current copy cat operations.

ELY also purchased Odyssey Sports Inc. from U.S. Industries for $130 million in cash. Odyssey produces a highly regarded and profitable line of putters which is a good fit with Callaway. Callaway should grow along with the sport of golf for many years to come.

Recommended Allocations

Aggressive portfolios: 75% equities, 25% cash.

Conservative portfolios: 55% equities, 45% cash.

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